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The Hot Catalog Market Is Headed for a Cooldown (Guest Column)

Rising inflation and interest rates could be leading to a seismic shift in the catalog-sale marketplace.

One of the most common questions we hear from creators thinking about selling their song catalogs is “What do they” — the buyers — “know that I don’t?” The answer is simple: The catalog-sale marketplace has been driven by institutional investors, and they are looking for yield — a predictable rate of return. In the low-interest-rate environment of the last decade, it has been impossible to find yield in financial instruments like bonds. Music royalties, though, provide a steady return that is not correlated to traditional asset classes.

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Most sellers, however, aren’t thinking about how macroeconomic factors like interest rates affect music royalties. They are inextricably linked, and with inflation at 7.5% — a 40-year high — and the Federal Reserve indicating that it will begin raising rates in March to reduce that figure, a seismic shift in the catalog-sale marketplace could be brewing.

Two years ago in Billboard, we highlighted the low-interest-rate environment as the driving force behind the heated catalog-sale marketplace. We also compared a catalog to a bond, which became a widely accepted analogy. Historically, interest rates and bonds move in opposite directions: When interest rates rise, bond prices drop. One of the biggest threats to a bond portfolio is interest-rate risk.

How does this relate to royalties? Bonds pay a coupon rate (a percentage of the face value); catalogs pay royalties.

Here’s how you determine the “coupon” on your catalog if you sell it. Let’s assume you are selling your catalog for a multiple of 13 times its net publisher’s share (essentially annual gross profit). The effective coupon is 100 divided by 13, which equals 7.69%. As interest rates rise, a bond with a lower coupon rate will generally experience a greater decrease in value than one with a higher coupon rate. So a catalog that sells for a multiple of 13 will experience a greater decrease in value than one that sells for a multiple of 10 because the buyer is assigning greater value to future cash flows.

Higher inflation also affects catalog sales because it reduces the value of future royalty payments. The higher the multiple, the more pronounced the inflation effect because more royalty payments are required for the buyer to be made whole.

Many catalog acquisitions are financed using debt and leverage. If leverage has a floating (or adjustable) interest rate, then every rate increase results in an exponential increase in cost to the borrower.

What buyers also know is that a 7.69% return barely beat inflation last year, when it was 7%, and we’re not even factoring in the cost of capital. When rates rise and inflation settles, institutional investors will look elsewhere for return.

The catalog-sale marketplace won’t disappear overnight, but it will certainly cool, especially when you consider all the big deals that have been made over the last few years. Moving forward, many looking to sell their catalogs will be newer artists with less of an earnings history, which makes the deals far more speculative. Investors will pay lower multiples for speculative fixed income (royalties), especially in a higher-interest, higher-inflation environment.

Bottom line: If you are considering selling, the current economic environment provides an unprecedented opportunity to capitalize financially on your success.

Former artist manager Dan Weisman is a vp/financial adviser at Bernstein Private Wealth Management in Nashville. Adam Sansiveri is a managing director and head of Bernstein’s Nashville Private Client Group and co-head of its Sports, Media and Entertainment Group.

Dan Weisman, Adam Sansiveri
Dan Weisman, Adam Sansiveri AllianceBernstein